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Bitcoin Vs Goldcoin
Bitcoin… Monetary Nirvana?
If you don’t know what Bitcoin is, do a little research on the internet and you’ll get plenty… but the short story is that Bitcoin was created as a medium of exchange, with no central bank or issuing bank. be involved Also, Bitcoin transactions are supposed to be private, i.e. anonymous. The interesting thing is that Bitcoins do not exist in the real world; they exist only in computer software, as a kind of virtual reality.
The general idea is that Bitcoins are mined… interesting term here… by solving an increasingly difficult mathematical formula, harder as more Bitcoins are mined; again interesting- on a computer. Once created, the new Bitcoin is put into an electronic “wallet”. It is then possible to trade real goods or Fiat currency for Bitcoins… and vice versa. Also, since there is no central issuer of Bitcoins, everything is highly distributed, thus resisting being “managed” by authority.
Naturally, the proponents of Bitcoin, those who benefit from the growth of Bitcoin, insist quite loudly that “sure, Bitcoin is money”… and not only that, but “it’s the best money ever, the money of the future” . etc… Well, Fiat advocates scream just as loudly that paper money is money… and we all know that Fiat paper is in no way money, as it lacks the most important attributes of real money. So the question is whether Bitcoin even qualifies as money… it doesn’t matter if it is the money of the future or the best money ever.
To find out, let’s look at the defining attributes of money and see if Bitcoin qualifies. The three essential attributes of money are;
1) money is a stable store of value; the most essential attribute, since without stability of value the function of numeraire, or unit of value measurement, fails.
2) money is the currency, the unit of account.
3) money is a medium of exchange… but other things can also fulfill this function, ie direct exchange, ‘compensation’ for the goods exchanged. Also ‘trade in goods’ (chits) that have value temporarily; and finally the mutual credit exchange; that is, offsetting the value of fulfilled promises through the exchange of bills or IOUs.
Compared to Fiat, Bitcoin doesn’t do badly as a medium of exchange. Fiat is only accepted in the geographic domain of its issuer. Dollars are not good in Europe, etc. Bitcoin is accepted internationally. On the other hand, very few retailers currently accept Bitcoin payments. Unless acceptance grows geometrically, Fiat wins…albeit at the expense of cross-country trade.
The first condition is much harder; money needs to be a stable store of value… now Bitcoins have gone from a “value” of $3.00 to about $1000, in a few years. This is so far from being a “stable store of value”; how can you get! In fact, these gains are a perfect example of a speculative boom…like Dutch tulip bulbs, junior mining companies, or Nortel stock.
Of course, Fiat fails here too; for example, the US dollar, the ‘main’ fiat, has lost over 95% of its value in just a few decades…neither fiat nor Bitcoin qualify as the most important measure of money; the ability to store value and preserve value over time. Real money, namely gold, has demonstrated the ability to hold value not just for centuries, but for eons. Neither Fiat nor Bitcoin has this crucial ability…both fail as money.
Finally, we come to the second attribute; that of being the numerary. Now this is really interesting, and we can see why both Bitcoin and Fiat fail as money, by looking closely at the question of “money”. Numeraire refers to the use of money not only to store value, but also to measure or compare value. In the Austrian economy, it is considered impossible to really measure value; after all, value resides only in human consciousness…and how can you really measure anything in consciousness? However, through the Mengerian principle of market action, i.e. the interaction of supply and demand, market prices can be established…even momentarily…and this market price is expressed in cash terms, the most marketable good, which is money.
So how do we set the value of Fiat…? Through the concept of ‘purchasing power’…ie the value of Fiat is determined by what can be traded…the so-called ‘basket of goods’. But his clearly implies that Fiat has no value of its own, but that value flows from the value of the goods and services for which it can be traded. Causality flows from the ‘purchased’ commodity to the Fiat number. After all, what’s the difference between a dollar bill and a hundred dollar bill other than the printed number… and the purchasing power of the number?
Gold, on the other hand, is not measured by what it trades for; rather, uniquely, it is measured by another physical standard; by its weight or mass. A gram of gold is a gram of gold, and an ounce of gold is an ounce of gold…no matter what number is engraved on its surface, “face value” or otherwise. The causality is the opposite of that of Fiat; Gold is measured by weight, an intrinsic quality…not purchasing power. Now, do you have any idea what an ounce of dollars is worth? There is no such thing. Fiat is only “measured” by an ephemeral amount…the printed number, the “face value”.
Bitcoin is far from being cash; not only is it simply a number, like Fiat…but its value is measured in Fiat! Even if Bitcoin becomes internationally accepted as a medium of exchange, and even if it succeeds in replacing the dollar as accepted “money”, it can never have an intrinsic measure like Gold. Gold is unique in being measured by a true and unchanging physical quantity. Gold is unique in storing value for thousands of years. Nothing else within the reach of mankind has this unique combination of qualities.
In conclusion, while Bitcoin has some advantages over Fiat, namely anonymity and decentralization, it fails in its claim to be money. Its advantages are also questionable; the intention is to limit the ‘mining’ of Bitcoins to 26,000,000 units; that is, the ‘mining’ algorithm becomes increasingly difficult to solve, and then impossible after mining all 26 million Bitcoins. Unfortunately, this announcement could very well be the death knell for Bitcoin; already, some central banks have announced that bitcoins may become a “reservable” currency.
Wow, sounds like a big step for Bitcoin, doesn’t it? After all, the “big banks” seem to accept the true value of Bitcoin, don’t they? What this really means is that the banks recognize that they could exchange Fiat for Bitcoins… and actually buying the 26 million Bitcoins predicted would cost a measly 26 billion Fiat dollars. Twenty-six billion dollars is not small change for Fiat Printers; that’s about a week of printing by the US Fed alone. And, once Bitcoins are bought and locked up in the Fed’s “wallet”…what useful purpose could they possibly serve?
There would be no Bitcoins in circulation; a perfect corner If there are no Bitcoins in circulation, how could they be used as a medium of exchange? And what could Bitcoin issuers do to defend themselves against this fate? Change the algorithm and increase the 26 million to… 52 million? Up to 104 million? Join the Fiat Press Parade? But then, according to the quantity theory of money, Bitcoin would begin to lose value, just as Fiat supposedly loses value with “overprinting”…
We come to the key issue; Why look for “new money” when we already have the best money, gold? Fear of confiscation of gold? Lack of anonymity from an intrusive government? Brutal taxation? Fiat legal tender laws? All of the above. The answer is not in a new form of money, but in a new social structure, one without Fiat, without Government spying, without drones and strike teams… without IRS, border guards, TSA thugs… little more. A world of freedom not tyranny. Once this is achieved, gold will resume its old and vital role as honest money…and not a moment sooner.
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